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Stephanie Simmons Ray 206-223-7401© 2008 Lane Powell PC Written Federal Tax Advice – Regulation and Risks ___________ Selected Topics.

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Presentation on theme: "Stephanie Simmons Ray 206-223-7401© 2008 Lane Powell PC Written Federal Tax Advice – Regulation and Risks ___________ Selected Topics."— Presentation transcript:

1 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Written Federal Tax Advice – Regulation and Risks ___________ Selected Topics Oregon/Washington Tax Institute May 2, 2008 Neil D. Kimmelfield

2 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Introduction

3 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Topics ● Section 6662 penalty protection ● FIN 48 ● Circular 230 ● Disciplinary rules ● Section 6694 preparer penalties ● Malpractice risk ● Tax shelter promoter penalties ● Criminal penalties for false statements ● Confidentiality of tax advice ● Comfort levels

4 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC What Can Happen to You if You Mess Up? ● Sanction by the IRS? ● Tax penalties? ● Malpractice claim by client? ● Discipline by the bar? ● Securities law exposure? ● Criminal penalties?

5 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC What Can Happen to Your Client if You Mess Up? ● Unexpected taxes plus interest ● Tax penalties ● Losses from a dumb investment

6 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC What Is “Messing Up?” ● Giving a wrong answer ● Giving a really wrong answer ● Warning the client, but not warning enough ● Insufficient due diligence ● Lying about the tax consequences ● Giving too weak an opinion

7 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC What Is the Setting for Your Advice? ● Planning a transaction – hypothetical tax advice ● Evaluating a prospective transaction – assumed facts ● Return preparation advice (ordinary) ● Return preparation advice (tax shelter) ● Assisting with a marketed transaction ● Assisting with FIN 48 computations

8 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Common Terms ● More likely than not (MLTN) ● Substantial authority ● Reasonable basis ● Reasonable belief ● Reasonable cause ● Comfort level ● Penalty protection ● Significant tax-avoidance purpose

9 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Penalty Protection Advice

10 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties ● The Code sections  6662 (substantial understatement)  6662A (reportable transactions)  6664 (reasonable cause)

11 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Section 6662 basics  Penalty based on amount of understatement  Supporting authority for a losing position can reduce the penalty  Penalty is reduced by the tax attributable to a position with adequate support (a “Supportable Position”)

12 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Non-tax shelter Supportable Positions  Objectively, there is SUBSTANTIAL AUTHORITY OR  Objectively, there is a REASONABLE BASIS, and the facts are disclosed on the return OR  Objectively, the position is just a loser, BUT: wThe taxpayer acted in GOOD FAITH with REASONABLE CAUSE

13 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Tax shelter Supportable Positions  Objective substantial authority doesn’t help  Objective reasonable basis doesn’t help, even with disclosure HOWEVER  The penalty may be avoided to the extent the taxpayer acted in GOOD FAITH with REASONABLE CAUSE

14 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● What is a “tax shelter?”  Any “entity” or “arrangement” if a “significant purpose” of the plan or arrangement is the avoidance of Federal income tax  “Significant purpose” is not defined anywhere. (See outline page 14.)

15 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● How can written advice provide “reasonable cause?”  Reg. § 1.6664-4(b)(1): “Reliance on... professional advice... constitutes reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith.”

16 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Reasonable Cause: Minimum standards for advice (Reg. § 1.6664-4(c))  Must be based on all pertinent facts and circumstances and related law  May not be based on unreasonable factual or legal assumptions  May not unreasonably rely on representations

17 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Reasonable Cause: What advice does the taxpayer need?  Reg. § 1.6664-4(c)(2): Advice includes an opinion “on which the taxpayer relies... with respect to the imposition of the Code section 6662 accuracy-related penalty.”

18 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Reasonable Cause: What advice does the taxpayer need?  Does a “Substantial Authority” (or “Reasonable Basis”) opinion provide “reasonable cause?”  Does a stronger opinion put the taxpayer in a better position?

19 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Reasonable Cause for “tax shelter” items  Section 6664 regulations require belief in “MLTN” sustainability for corporate tax shelter items. See Reg. § 1.6664-4(f).  Section 6662 regulations require belief in “MLTN” sustainability for non-corporate tax shelter items. See Reg. § 1.6662-4(g). wAre these regulations obsolete?

20 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Reasonable Cause and Circular 230 disclaimers  Typical disclaimer language: This advice “was not written to be used and cannot be used for the purpose of avoiding penalties.”  12/17/04 Circular 230 Preamble: Section 6664 regulations will be amended to prohibit reliance on advice with disclaimer.  Is it “reasonable” to rely on advice with the disclaimer?

21 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Reasonable Cause for “Reportable Transactions”  See section 6662A  Special rule in section 6664(d) wTaxpayer must “reasonably believe” return treatment is MLTN proper wReasonable belief cannot be based on opinion from “material advisor” wReasonable belief cannot be based on opinion that does not satisfy due-diligence standards

22 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Protecting Client From Accuracy- Related Penalties (cont’d) ● Practical points:  Is a “tax shelter” involved? wIf so, taxpayer must have MLTN reasonable belief – probably based on your advice  Is your client relying on your analysis or your advice? wIf relying on advice, must satisfy due-diligence standards  Watch out for Circular 230 disclaimers wConsider “substantial authority” opinion without disclaimer

23 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC FIN 48 Advice

24 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC FIN 48 Advice ● Basic FIN 48 rules  To report the benefit of a tax position on a company’s financial statement, the company must determine that it is MLTN that the position will be sustained, based on the technical merits of the position, if the taxing authority examines the position.  The benefit to be recorded is the largest amount that is MLTN to be realized, taking into account the possibility of compromise.

25 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC FIN 48 Advice (cont’d) ● Functions of written advice  An unsophisticated company may need help making MLTN judgment about the merits of a position  Even a sophisticated company may have to demonstrate MLTN determination to auditors  Any company may need help predicting settlement scenarios

26 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC FIN 48 Advice (cont’d) ● Contents of FIN 48 opinion  Not necessarily a Circular 230 “covered opinion” (Reg. § 10.35(b)(2)(ii)(C)) wUse “disclaimer” language if return has not yet been filed  Find out what the auditors will need  Consider “roadmap” issues

27 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230

28 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 ● Sanctions  Applied only to violations committed “recklessly or through gross incompetence”  Censure, suspension, or disbarment from practice before the IRS (Reg. § 10.50(a))  Monetary penalty, not exceeding “the gross income derived (or to be derived) from the conduct giving rise to the penalty” (Reg. § 10.50(c))

29 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● What is “written advice”  Letters and memos  Includes “electronic communications” wE-mails wIntranet postings? wBulletin board postings? wVoice mail?

30 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● Standards for all written advice (Reg. § 10.37(a))  No unreasonable factual or legal assumptions  No unreasonable reliance on representations  Must consider all relevant facts the advisor “knows or should know”  May not take audit risk into account

31 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● “Covered opinions” are subject to additional rules ● What is a “covered opinion?”  Opinions on “listed transactions”  Opinions on “principal purpose” transactions  Certain opinions on “significant purpose” transactions

32 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● When do opinions on “significant purpose” transactions become “covered opinions?”  Reliance opinions  Marketed opinions  Confidential opinions  Money-back opinions

33 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● What is a “reliance” opinion?  Concludes it is MLTN that at least one “significant Federal tax issue” will be resolved in taxpayer’s favor ● “Reliance opinion” status can be avoided with disclaimer language  “This opinion was not intended to be used, and it cannot be used, to avoid penalties that may be imposed on the taxpayer.”

34 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● What is a “marketed” opinion?  Practitioner has reason to know the opinion will be used in “promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayer(s).” ● “Marketed opinion” status can be avoided with adequate disclosures  Opinion cannot be relied on for penalty avoidance  Opinion was written to support promotion of the arrangement  Taxpayer should get independent tax advice

35 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● When can a “limited scope” opinion avoid being a “covered opinion?”  Can’t relate to a “listed” transaction  Can’t relate to a “principal purpose” transaction  Can’t be a “marketed” opinion  Must contain required disclosures (see next slide)  Taxpayer must agree that its ability to rely is limited

36 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● Required disclosures for “limited scope” opinions (Reg. § 10.35(e)(3))  The scope of the opinion is limited  There are issues that could affect the overall Federal tax treatment that are not addressed  The opinion can’t be used to avoid penalties with respect to issues outside the scope of the opinion

37 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● Requirements for “covered opinions” (Reg. 10.35(c))  Must identify all factual assumptions in a separate section  Must identify all factual representations in a separate section

38 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● Requirements for “covered opinions” (cont’d)  Must consider all “significant federal tax issues” and must evaluate likelihood of prevailing on each  Must provide “overall conclusion as to the likelihood that the Federal tax treatment of the transaction or matter that is the subject of the opinion is the proper treatment”

39 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Circular 230 (cont’d) ● Requirements for “covered opinions” (cont’d)  If a marketed opinion, must say so and must recommend getting independent tax advice  Must disclose any compensation arrangement between the advisor and a person other than the client

40 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC ABA Guidance on Tax Opinions

41 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Disciplinary Rules – ABA Opinions ● Both Oregon and Washington have adopted Rules of Professional Conduct based on the ABA Model Rules ● Neither State has issued guidance regarding tax opinions ● ABA Opinions could be given weight by the courts

42 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Disciplinary Rules – ABA Opinions (cont’d) ● ABA Opinion 314 (1965)  Attorney is advocate for taxpayer; no duty to disclose weakness to IRS ● ABA Opinion 85-352 (1985)  Attorney may advise taking a position only if there is a “realistic possibility of success” in litigation  No definition of this standard  No due-diligence requirement

43 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Disciplinary Rules – ABA Opinions (cont’d) ● ABA Opinion 346 (1982)  Addresses only marketed tax shelter opinions  Provides due diligence, good faith, and full- disclosure guidelines similar to those in Circular 230 for covered opinions

44 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) – Return Preparer Penalty

45 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty ● Overview  An advisor can be treated as a return preparer  A return preparer may be subject to penalty if the return has an understatement due to an “unreasonable position”  If a position is undisclosed, it must pass a MLTN test to avoid the penalty  The penalty can be as much as 50% of the preparer’s fee  IRS gave temporary relief from the MLTN standard in Notice 2008-13  Congress may fix this

46 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● When is an advisor a preparer?  When giving advice that is “directly relevant” to a determination relating to an entry on a return IF  The entry is considered to be a “substantial portion” of the return

47 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● When is advice “directly relevant” to a return item?  Pre-transaction planning does not count  Advice regarding GAAP tax reserves does not count  Other advice may be considered “directly relevant” to a return item

48 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● When is a return entry a “substantial portion” of the return?  Reg. § 301.7701-15(b)(1): Determined by “comparing the length and complexity of, and the tax liability or refund involved in, that [entry] to the length and complexity of, and tax liability or refund involved in, the return or claim for refund as a whole.”  How does advisor know whether this applies???

49 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● When is a return entry a “substantial portion” of the return? (cont’d)  Notice 2008-13: An entry that “could result in a deficiency determination (or disallowance of refund claim) that the preparer knows or reasonably should know is a significant portion of the tax liability reported on the tax return....”  Not much comfort if little or no tax is reported!

50 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● Avoiding the penalty  [Assume there is an erroneous position resulting in an understatement]  Was the position disclosed?  If it was, no penalty if there was a “reasonable basis” for the position  If it was not, you must have had “reasonable belief” it would MLTN be sustained

51 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● What is “disclosure” under sec. 6694?  Under the Code: “Relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return.”  Problem: The taxpayer won’t want to do this if there is substantial authority

52 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● “Disclosure” under Notice 2008-13  Advice to taxpayer: “the advice … includes a statement informing the taxpayer of any opportunity to avoid penalties under section 6662 that could apply to the position as a result of disclosure, if relevant, and of the requirements for disclosure.”  Advice to return preparer: “the advice to the tax return preparer includes a statement that disclosure under section 6694(a) may be required.”  This is easy! Do it!

53 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● No disclosure: Must apply the MLTN test  Preparer must have a “reasonable belief” the position would MLTN be sustained on its merits wMust have MLTN belief wBelief must be reasonable

54 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● Requirements for MLTN belief  Must be based on analysis of pertinent facts and authorities (like “substantial authority” analysis)  Must conclude MLTN to be sustained “if challenged by the IRS”  May rely on information provided by taxpayer  May not rely on information that “appears to be incorrect or incomplete”  May “rely in good faith and without verification upon information furnished by another advisor”

55 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● Bottom line for advisors  Know when you are a “return preparer”  Take advantage of the Notice 2008-13 disclosure safe harbors

56 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6694(a) Return Preparer Penalty (cont’d) ● Possible amendment by Congress (Rangel bill – H.R. 5719)  Most positions would be subject to “substantial authority” standard  Disclosed positions: “Reasonable basis” standard  Tax shelters: Reasonable belief/MLTN standard

57 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Malpractice Risk

58 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Malpractice Risk ● Can you be held liable for giving bad tax advice? ● Yes!

59 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Malpractice Risk (cont’d) ● To whom do you owe a duty?  Your client  Third parties you had reason to know would rely on the advice ● Make sure you opinion specifies who may rely on it

60 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Malpractice Risk (cont’d) ● Possible damages  Losses must be caused by the negligent advice  Causation is not always clear

61 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Malpractice Risk (cont’d) ● Possible damages (cont’d)  Unexpected tax liability wWould it have been incurred anyway?  Deficiency interest wDid taxpayer benefit from deferred payment of tax?

62 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Malpractice Risk (cont’d) ● Possible damages (cont’d)  Penalties wWould taxpayer have taken the position without the opinion?  Transaction/investment losses wWould taxpayer have done the deal anyway?

63 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Malpractice Risk (cont’d) ● Standard of care  Specialists are held to standard of care appropriate for attorneys practicing in the specialty  There is a higher standard of care for tax specialists  There may be an even higher standard for sub-specialties

64 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Malpractice Risk (cont’d) ● Malpractice avoidance  Specify who may rely on your advice  Don’t give an opinion in an area you don’t know  Don’t oversell your expertise  If you’re a tax generalist giving very technical advice, suggest to your client that you consult a specialist  Don’t give a stronger opinion than necessary

65 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 6700 – Tax Shelter Promoter Penalty

66 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Tax Shelter Promoter Penalties ● Federal penalty – Code section 6700  Elements wAssists in organizing, or assists in selling, an entity, plan, or arrangement AND wKnowingly makes a false statement about a material matter wAbout a tax benefit in connection with the entity, plan, or arrangement

67 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Tax Shelter Promoter Penalties ● Federal penalty – Code section 6700  Penalty = 50% of gross income to be derived from the activity  This penalty has been imposed on attorneys actively involved in promotion  Query: How much involvement in promotion is necessary?

68 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Tax Shelter Promoter Penalties (cont’d) ● Oregon penalty – ORS 314.406 (2007)  Penalty applies if Code section 6700 applies  Applies only to “a person who promotes a tax shelter” with Oregon contacts  Penalty is 100% of the gross income derived in promoting the shelter  Query: Is “promoting” narrower than the scope of section 6700?

69 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Section 7206(2) – Criminal Liability For False Statements

70 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Criminal Penalty for False Statements – Section 7206(2) ● “Any person who... [w]illfully aids or assists in... or advises the preparation... under... the internal revenue laws, of [any] document, which is fraudulent or is false as to any material matter... shall be guilty of a felony....” ● Penalty: Up to a $100,000 fine and 3 years’ imprisonment

71 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Criminal Penalty for False Statements – Section 7206(2) (cont’d) ● What may cause a tax opinion to be criminally false?  A false conclusion due to reliance on material facts known to be untrue OR  A false conclusion due to legal analysis known to be incorrect (?)

72 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Criminal Penalty for False Statements – Section 7206(2) (cont’d) ● Justice Department letter to court in KPMG case: “[W]hile the opinions state that certain tax treatments of certain facts (falsely) described in the opinion letter are more likely than not to survive IRS challenge, the Government alleges that conspirators did not, in truth, believe that to be so.”

73 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Opinions

74 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice ● Concern  You need to disclose risks to your client  Circular 230 may require you to discuss adverse authority  Section 6664 “reasonable cause” opinions must consider “contrary” authorities  Client’s auditors may insist on full analysis in FIN 48 opinions BUT…..  You don’t want to give the IRS a “roadmap”

75 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● IRS summons authority  Code section 7602: “For the purpose of... determining the liability of any person for any internal revenue tax... the Secretary is authorized – (1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry ….”

76 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● IRS summons authority (cont’d)  United States v. Arthur Young & Co., 465 U.S. 805 (1984): “The language ‘may be’ reflects Congress' express intention to allow the IRS to obtain items of even potential relevance to an ongoing investigation, without reference to its admissibility.”

77 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● IRS policy of restraint for “tax accrual workpapers” (TAWs”)  TAWs are defined as: “audit workpapers, whether prepared by the taxpayer, the taxpayer's accountant, or the independent auditor, that relate to the tax reserve for current, deferred and potential or contingent tax liabilities....”  IRM 4.10.20.3.1(1): “Audit or tax accrual workpapers should be requested with discretion and not as a matter of standard examining procedure.”

78 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● IRS policy of restraint for “tax accrual workpapers”  Under IRM 4.10.20.3.1(2)a., IRS will not request tax accrual workpapers unless: “A specific issue has been identified by the examiner for which there exists a need for additional facts.”  I.e., workpapers should not be sought in a fishing expedition

79 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● Legal opinions  Should be subject to IRS summons authority unless privileged  “Policy of restraint” should apply to FIN 48 opinions

80 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● Protections for legal opinions  Attorney-client privilege  Work-product doctrine

81 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● Elements of attorney-client privilege  Communication made in confidence  To an attorney  In connection with legal services  In an attorney-client relationship ● Attorney communications that contain client information are covered

82 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● Required expectation of confidentiality  An opinion is not protected by the attorney-client privilege if it is intended to be disclosed to a third party.  Thus, a penalty-protection opinion may not be privileged.  See Long-Term Capital Holdings, et al. v. United States, 90 AFTR2d 2002-7446 (D. Conn. 2002).

83 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● Waiver of privilege through disclosure  A privileged opinion may lose protection if it is actually disclosed to third parties, such as the taxpayer’s auditors.  See United States v. Textron, Inc., 507 F. Supp 2d 138 (D. R.I. 2007).

84 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● Work-product doctrine  FRCP Rule 26(b)(3) limits the discovery of documents “prepared in anticipation of litigation or for trial.”  May be obtained only by showing “substantial need.”  Special protection given to “mental conclusions, opinions, or legal theories of an attorney”

85 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● Work-product doctrine (cont’d)  Disclosure to third parties does not automatically waive work-product protection  Key is maintaining confidentiality from litigation adversaries

86 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● Application of protections to legal opinions  Transaction-planning opinions: Generally should be protected by attorney-client privilege  Tax-return assistance opinions: wMay be protected by attorney-client privilege if the client prepares its return “in house” wLittle chance of protection if the client is expected to provide the opinion to an outside return preparer

87 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Confidentiality of Tax Advice (cont’d) ● Application of protections to legal opinions (cont’d)  Section 6662 penalty-protection opinions: Little chance of attorney-client privilege protection; difficult to show expectation of confidentiality  FIN 48 opinions: wGood chance of attorney-client privilege protection if client does not disclose opinion to outside auditors wNo attorney-client privilege protection if opinion is disclosed to auditors wPossible work-product protection even if opinion is disclosed to auditors, if client can demonstrate that opinion would not have been obtained but for the client’s anticipation of litigation – see Textron decision

88 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC “Comfort Levels”

89 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Comfort Levels ● Crude hierarchy  Will  Should  MLTN  Substantial authority  Reasonable basis

90 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Comfort Levels (cont’d) ● MLTN formulations in the law  MLTN the proper treatment (section 6664(d)(2)) wUnder Regs, MLTN that treatment “will be upheld if challenged by the Internal Revenue Service.”  MLTN that the position would be sustained on its merits (section 6694)

91 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Comfort Levels (cont’d) ● MLTN formulations in the law (cont’d)  MLTN that an issue would be resolved in the taxpayer’s favor (Reg. § 10.35(b)(4))  MLTN that the tax treatment will be upheld if the IRS challenges it (Prop. Reg. § 10.34(e)(1))  MLTN that the position will be sustained if the taxing authority examines the position (FIN 48) wI think this is the clearest and best.

92 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC Comfort Levels (cont’d) ● Examples of various formulations  Will be deductible  Will be allowed as a deduction  Will be allowed if examined in a well-reasoned decision  Will be “x” and should be so treated ● Query: Does “MLTN is examined in a well- reasoned decision” give penalty protection?

93 Stephanie Simmons Ray rays@lanepowell.com 206-223-7401© 2008 Lane Powell PC SeattlePortland OlympiaAnchorage TacomaLondon www.lanepowell.com


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